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There follows a list of times and events where traders are prone to losing their discipline. I have broken them down into five core headings;
Not having a clearly defined strategy with an edge is the first typical problem here. Having this is a pre-requisite to successful, consistent,disciplined trading. Without one it is actually impossible to see if you are
being disciplined or not, as there is no accountability as to whether you followed your plan and stuck to your strategy – not having had one in the first place!
Without having clearly defined trading opportunities, you are trading in a more random and haphazard fashion, which will quickly lead, if not there already, to dangerous ill-discipline.
Trading a time frame, style or market that does not match your talents, skills, risk tolerance, personality
or interests is another problem. If you are trading in a way that is not best suited to you, and particularly if
this is a long way off-course,then cracks will appear and elements of ill-discipline will occur. This isn’t a problem with yourself as a trader, but arises simply because you and your strategy are out of line. For example, someone who is trading a short time frame, but who is a much more analytical and slower thinker and decision-maker, may find that they have challenges in taking trades with sufficient speed. To make
matters worse, they then get frustrated that they missed out, and end up getting in too late and chasing the trade.
Environmental/external distractions and quiet times in markets – or just plain boredom – is the first mental issue. One of the biggest revelations that many new traders experience is that trading is not a 100% full-on,adrenaline-fuelled rollercoaster! There are often long periods where not much is happening, and the markets are quiet. The danger here is that you get bored and trade just to do something, and not because a trading opportunity as defined by your strategy has arisen. Ask yourself – are you trading to relieve boredom or to make money? Find other tasks to do while the markets are quiet – reading, research, strategy development and so on.Fatigue and mental overload lead to poor concentration.trading can equally have very long hours and the intensity levels can be exceptionally high. Firstly, ensure that you are managing your physical energy to counter this decline. And secondly, monitor your energy levels throughout the day so
that you can be aware and respond accordingly should they go beyond your desired level for good performance.
Anger and frustration following losses/poor trading can be dangerous. The changes that occur to your physiology and psychology when you are angry and frustrated affect your ability to make objective and reasoned decisions.
You are greatly at risk of trading emotionally and not objectively. Take time out and wait until you are in a good trading state before re-entering the markets
Overconfidence resulting from a string of successes is the flipside risk. Overconfidence is a dangerous feeling – it will get you involved in the markets and with bigger positions than might be appropriate! Create awareness of when overconfidence might occur for you; and, where necessary, stop trading, or consciously manage your positions.
Unwillingness to accept losses (loss aversion/ego) is a common problem. If you are not willing to take a loss then you are always likely to run one and to move stops. Accepting losses and dealing with them effectively is key to disciplined trading.
Taking on too much risk. High risk creates higher stress, and higher stress creates stronger anxiety and worry; all this weighs down badly on your decision-making ability. Excessive positions also carry with them the potential for huge painful losses that no one wants to take. So taking appropriate risk is a key necessity of, as well as component in, disciplined trading.
Greed is another pitfall. Wanting too much too soon, or trying to make every trade a big winner, are common. Again the key is to assess your strategy, accept that as traders we are in and out of the market over our desired time frame, whilst the market moves both before and after we enter and exit. Our aim is to capture profits within the time frame of our system.
Fear. This can come in many forms and may lead to you either not entering the market or getting out too late or too early. Fear of loss, fear of missing out, fear of leaving money on the table are just three possibilities. Managing trading position size, accepting losses as a part of trading, and having confidence in your trading strategy and your own trading ability will all help to reduce or eliminate any fears.
Situational pressures – slumps, financial pressures, stress outside of trading. Sometimes trading does not go to plan or you get a period of draw down that might be extended in time or deep in cost. Likewise, sometimes life outside of trading presents challenges that can have an impact on you. Where these conditions arise, your mindset can often be affected; and, as a result, your behaviors can become less disciplined. A typical example is where traders are having financial difficulties either in their trading or outside of work and they start to get into desperation-mode. Their only goal becomes to make money in any way possible, which immediately moves them away from the discipline of sticking to their strategy
Some people are by nature not rule-driven, and may live rather by the rebellious axiom that ‘rules are there to be broken’. Others may be impulsive, whilst still others may be sensation-seekers who love excitement and high level risk-taking. In all of these cases there is a potential challenge to discipline, so the key issues become getting the best match of the trader to a trading style that most accommodates their personality and/or working with them to make some changes in their natural approach (the second of these is by far the hardest, especially if the behaviours are well ingrained).